S&P defends ratings in council case

The legal team of Standard & Poor’s has argued that councils that bought a structured products that they had rated AAA may have suffered losses from other risky investments whilst reiterating their stand that their ratings constitute nothing more opinions with extensive disclaimers.

The rating agency is appealing the landmark decision by the Federal Court of November 2012 that found S&P along with investment bank ABN AMRO and advisor Local Government Financial Services were responsible for the investment losses suffered by councils that bought constant proportion debt obligations called Rembrandt Notes.

The ruling instructed ABN AMRO, S&P and LGFS to pay $20 million to compensate 12 councils for losses related to the products which were sold in 2006.

Barrister Steven Finch SC argued on behalf of S&P that the agency could not operate if its ratings were relied upon by investors to make decisions to the extent that they were liable for losses.

“Business would be impossible if it were relied upon. The recipient of advice cannot clip it off from the qualifications," Mr Finch told the court.

He also argued that investors in the product such as councils should perhaps not have been investing in structured products.

“The ratings are not a promise but a predictive opinion," he said, to which one of the judges responded that “opinion can indeed be misleading,"

“For reasons unconnected to the rating they should not have been in the shop,"said Mr Finch.

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Barrister Finch painstakingly argued that S&P’s assignment of a AAA rating was in fact a statement of fact and in itself was not misleading, regardless of whether the actual rating was appropriate in hindsight.

Mr Finch also argued that councils and LGSF which distributed the products to these local councils may have ultimately bought other structured products and had earmarked funds specifically for higher yielding products.

He said that previous judgement did not consider what investments the councils may have bought had they not been offered the high yielding Rembrandt notes and therefore would not have been immune to losses.

“They were interested in…buying a sports car,"he said.

Mr Finch line of argument was widely questioned by the panel of judges that pointed out that Bathurst Council had in fact never purchased a CDO prior to its investment in the Rembrandt CPDO.